WHAT SURPRISE?

“Why mid-September? That’s when you are going to get the August PPI report, and that should mark the low in deflationary reports. From there, you’ll see what we have coined Reflation’s Rotation into Q4. This simply means y/y Q3 price deflation will morph into y/y Q4 price inflation. –KM 8/18/09

Today’s PPI release for August showed an increase of 1.7% month-over-month the fourth sequential monthly increase (a decline of 4.34% over last Augusts reading). Although this increase was driven primarily by rising fuel costs, so called “Core” prices increased by 0.2% for the month catching many observers off guard.

Keith wrote last month that the number released today would mark the low for the deflationary cycle and that the Reflation Rotation we have been predicting for Q4 would start develop; causing interest rate expectations to creep upwards and, ultimately, to moderate the trajectory of the dollar’s decline. As we wait for Tomorrow’s CPI reading looking for more confirmation we remain positioned for these expected shifts in both reality and sentiment with portfolio positions like our long TIPs/short the 2 Year pair.

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